FAQ: Decoding The $716 Billion In Medicare Reductions

Guest post by Mary Agnes Carey, Kaiser Health News Staff Writer

The structure and financing of Medicare, the federal health insurance program that serves seniors and the disabled, has become a defining issue in the presidential and congressional campaigns since GOP presidential candidate Mitt Romney picked Rep. Paul Ryan, R-Wis, as his running mate. KHN's Mary Agnes Carey answers some frequently asked questions about the numbers and policy surrounding the Medicare debate.

Q: Romney and other Republicans over the past two years have criticized President Barack Obama and Democrats for cutting $500 billion from the Medicare program over the next decade as part of the 2010 health care law. In the past couple of weeks, the number that Romney is using has grown to $716 billion? Which is right?

A: They both are. The $500 billion figure comes from a  March 2010 analysis that estimated the 2010 federal health law's effects on Medicare spending and was put together by the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT). It covered the budget years 2010-2019.

As part of their efforts to repeal the law, congressional Republicans in July asked the two agencies to estimate the impact of a repeal on Medicare.

That July analysis, which covered the years 2013-2022, determined that the health law is expected to reduce Medicare spending by $716 billion. It is higher than the previous figure because it covers a later time frame that includes greater Medicare spending reductions.

Q. Is the federal government cutting its spending on Medicare?

A. No. Medicare spending will increase each year but at a slower rate. For example, before the health law was passed, Medicare was expected to grow by 6.8 percent a year for 2010 through 2019. With the health law, that yearly growth rate is projected to be 5.6 percent during that same time frame, according to an  analysis from the Kaiser Family Foundation. (KHN is an editorially independent program of the Foundation).

Q: Where might Medicare spending be reduced?

A: The July report from CBO and JCT - in explaining where some of the biggest reductions would occur - found that hospital reimbursements would be reduced by $260 billion from 2013-2022, while federal payments to Medicare Advantage, the private insurance plans in Medicare, would be cut by approximately $156 billion. Other Medicare spending reductions include $39 billion less for skilled nursing services; $66 billion less for home health and $17 billion less for hospice. The law does not make any cuts to the amount of benefits beneficiaries receive and adds some new benefits, including closing the "doughnut hole" gap in Medicare prescription drug coverage, and new preventive services, such as an annual wellness visit with a physician.

Medicare's trustees say the law prolongs the solvency of the Medicare trust fund. In addition, supporters say that hospitals and other health care providers would be able to bear reduced payments because the cuts would be offset somewhat by increased revenues from millions of new customers who would gain health insurance through the law. They also argue that the Medicare Advantage plans were being overpaid since the cost per beneficiary was higher than what beneficiaries of traditional Medicare cost the government. But critics and some independent analysts have questioned whether cutting payments to these providers will result in a loss of quality or push some providers to refuse to participate in Medicare.

"The question is whether reductions in payments to health care providers will impair either access to health care services or the quality of those services," a recent Brookings Institution  analysis said.

Q: Ryan has a Medicare overhaul plan that includes the Medicare spending reductions, right?

A: Yes, Ryan's plan would keep the Democrats' Medicare spending changes, but he says he would use the money to make sure Medicare remained solvent, rather than directing it toward other areas, including funding the health law's exchanges or its expansion of Medicaid, the federal-state program for the poor. Democrats say Ryan would use the Medicare savings to fund other areas of this budget plan, including tax cuts for wealthy Americans and increases in military spending.

In a recent  blog post in National Review Online, James Capretta, a fellow at the Ethics and Public Policy Center, a conservative think tank, said it was an "oversimplification" to say that Ryan was keeping the Obama Medicare cuts. "Ryan's budget allows the substitution of sensible ways of saving money in Medicare for the arbitrary and harmful cuts contained in Obamacare," he writes.

Ryan's plan also calls for an overhaul of the program, offering beneficiaries a set amount of money that they would use toward buying a private plan or traditional Medicare. Democrats have argued that such a fundamental change could undermine the traditional Medicare program, because private plans might tailor their coverage to attract healthier beneficiaries, leaving sicker beneficiaries in traditional Medicare. Critics of Ryan's plan also predict it will force seniors to eventually pay more for their health care because the federal payments will be capped at the rate of gross domestic product plus half a percentage point, an amount that may not keep up with the increase in medical costs. Under Ryan's plan, insurers would have to provide benefits that are at least equal the value of those offered in traditional Medicare.

Q: Would Romney's Medicare plan keep the cuts in place as well?

A: That's unclear. While Romney has said his Medicare proposal is very similar to Ryan's, he has also asserted that he would rescind the Medicare funding reductions in the health law. However he has not said what steps he would take to extend the financial solvency of the program. In a Facebook posting on Aug. 16, Romney said he and Ryan "are talking about what adjustments we should make to Medicare for young people so that when they come along and become seniors, that they have a program that's solvent."